Why did the US oil prices fell below zero?

Due to the coronavirus pandemic, the world economy is hit hard. The US oil prices contracted into negative territory for the first time in history due to the imbalance in demand and supply.
Created On: Apr 21, 2020 11:17 IST
Modified On: Apr 21, 2020 11:49 IST
US oil prices
US oil prices

Due to the coronavirus pandemic, the world economy is hit hard. The US oil prices contracted into negative territory for the first time in history. On Monday, the price on the futures contract fell into negative territory i.e., minus $37.63 a barrel. 

While most parts of the world are under lockdown, the oil is not used and the American companies ran out of storage. This means that the sellers must pay the buyers to take oil from them. The price of a barrel of West Texas Intermediate crude contracted to be delivered in May closed at $18.27 a barrel on Friday and ended on Monday at negative $37.63. 

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Another reason is the OPEC+ deal signed amongst the US President Trump and Saudi Arabia with other oil-producing nations to cut oil production by nearly 10 million barrels a day, but it won't be effective until May. This clearly means that the oil sold in March and April (in the Middle East) will arrive in May and June but there is no storage space due to the unused oil. 

However, there is a hope that everything will get back on track as the contracts for June and July are trading higher, in the low $20s. This also signals about the conditions of the oil market in the nearer future and will also clarify whether the demand for oil prices will recover after dropping 30% due to the unprecedented pandemic.

This difference clearly states a market condition namely contango, where a commodity's futures contract are higher than the current contract. While on the other hand, there is a ray of hope that the economies may resume soon.  

Since the virus became a pandemic globally, oil prices have plunged as the demand for energy has collapsed. Economies globally are shut and there are no buyers. Additionally, the US no longer has enough storage capacity.  The prices fall into negative territory when the selling price falls below the producing and transporting cost. 

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